Should You Buy or Sell the Next Bounce?

by Sam Collins | April 14, 2014 2:37 am

Should You Buy or Sell the Next Bounce?

Stocks again closed lower on Friday, ending the worst week the Nasdaq and S&P 500 have experienced since 2012. The Nasdaq fell 1.3%, the S&P 500 was down 1%, and the Dow Jones Industrial Average lost 0.9%.

Stocks opened lower but then rallied, and by mid-morning had almost reached Thursday’s close. But momentum turned, and the remainder of the day was spent stair-stepping lower. The move down was again led by biotech and technology stocks. The iShares Nasdaq Biotechnology (IBB[1]) fell 2.9% and is now down 22% in less than seven weeks.  JPMorgan Chase (JPM[2]) missed analysts’ Q1 estimates and the stock fell 3.7%. This impacted the financial sector, which was down 1.2% despite better earnings from Wells Fargo (WFC[3]), which gained 0.8%.

The fall in stock prices is considered technical in nature since most of the news has been positive. The Producer Price Index rose 0.5% in March, beating estimates of 0.1%. And the University of Michigan Consumer Sentiment Index rose to 82.6 for April versus expectations of 81.

At Friday’s close, the Dow Jones Industrial Average fell 143 points to 16,027, the S&P 500 was off 17 points at 1,816, and the Nasdaq fell 54 points to 4,000. The NYSE primary market traded 815 million shares with total volume of 3.7 billion shares, and the Nasdaq crossed total volume of 2.3 billion shares. On the Big Board, decliners outpaced advancers by almost 2.5-to-1, while on the Nasdaq, it was 3.8-to-1.

For the week, The Dow fell 2.4%, S&P 500 was off 2.7%, and the Nasdaq lost 3.1%.

04 14 14 spx 300x190 Should You Buy or Sell the Next Bounce?
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chart key 300x84 Should You Buy or Sell the Next Bounce?[4]

The bear case strengthened last week, as the broad-based S&P 500 broke under its 50-day moving average for the first time since Feb. 10. And on Friday, with a low of 1,814.36, it came close to breaking the next support line at 1,813.

04 14 14 rut 300x191 Should You Buy or Sell the Next Bounce?
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The Russell 2000 has been leading the rest of the pack lower. However, it is now extremely oversold. With a Relative Strength Index reading of 34.86, it ranks with the recent low of 33.25 made on Feb. 3. And the index is resting on its 200-day moving average at 1,106.

Conclusion: With the S&P 500 close to breaking major support and the Russell actually in an intermediate bear trend, it is time to consider our prime sentiment indicator, the AAII Sentiment Survey. On Thursday, it was reported that bullish sentiment for the week of April 10 dropped to 28.48% from 35.36% the week before and 41.34% on March 13. Since this is a contrary indictor, it is telling us that it is time for a bounce.

But the selling is likely to continue because the Federal Reserve’s tapering of bond purchases puts pressure squarely on U.S. companies’ managements to perform. With the Fed’s help diminishing and S&P looking for a 2% earnings growth rate this year, one analyst quipped, “Well, I reckon that means that we’re on our own.”

As we reach the end of the best six-month seasonal performance period, you will soon be hearing the all-too-familiar phrase, “sell in May and go away.” The stock market is now so oversold that we should expect a bounce this week, and if we get it, perhaps we should begin selling in April and address May’s opportunities when they arrive.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[5].

For a list of this week’s economic reports due out, click here[6].

Endnotes:
  1. IBB: http://studio-5.financialcontent.com/investplace/quote?Symbol=IBB
  2. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  3. WFC: http://studio-5.financialcontent.com/investplace/quote?Symbol=WFC
  4. [Image]: http://investorplace.com/wp-content/uploads/2013/05/chart-key.gif
  5. click here: http://www.bloomberg.com/apps/ecal?c=US
  6. click here: http://www.bloomberg.com/markets/economic-calendar/

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